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Morningstar | Cheniere Energy Reports Good Second Quarter Amid Newly Uncertain LNG Market

Amid the new uncertainties introduced in the past few days with China adding LNG as a potential product for higher tariffs, Cheniere Energy reported good second-quarter results. Full-year EBITDA guidance of $2.3 billion to $2.5 billion was maintained, with our 2018 EBITDA estimate standing at $2.4 billion. We do not expect to change our fair value estimates for the Cheniere entities or our wide moat ratings. Cheniere also indicated that it did not expect any economic impact over its LNG contracts with PetroChina, despite the recent tariff issues.

In response to U.S. President Donald Trump's recent threat to boost tariffs on Chinese imports, China has proposed that it could add liquefied natural gas to a list of products with a 25% tariff. The list is not yet final, so it is possible that it could be removed. The impact on this shift on Cheniere Energy and Cheniere Partners should be low, but it introduces uncertainty into a market that needs a high level of confidence in the market to pursue 20-year contracts. Signing new contracts for U.S. LNG export terminals and exports will be challenging given the uncertainties over price, which introduces delays. Still, the LNG market appears very strong, with demand from China increasing more than 50% from last year's levels. While it is possible U.S. LNG exports in terms of spot market shipments to China may be in flux for the remainder of the year, we would expect them to be rerouted to other countries and overall LNG imports to China to still increase significantly.

Over the long run, we don't think China will change its pivot toward gas over coal as a feedstock for both environmental and cost reasons. In an effort to improve the environment and reduce the usage of dirtier coal, China's Thirteenth Five Year Plan has set the goal of making natural gas 10% of the country's energy mix by 2020, which would imply double-digit growth rates over the next few years. We would expect more of an impact over the long run if another country other than the U.S. had the ability to significantly increase natural gas production, as this would represent competition for U.S. gas.

Finally, progress on train commissioning and under construction efforts seems to be proceeding with no issues. We do think it makes sense for Cheniere to proceed with construction of the Train 3, as it received the needed customer contracts, which is due in service in 2021. The firm has also filed an application with the Federal Energy Regulatory Commission for seven midscale liquefaction trains with a capacity of 9.5 million tons per year, compared to its existing trains, which are around 4.5 million tons annually each. We think pursuing smaller trains makes sense as it is easier to obtain a final investment decision as customers can make smaller commitments.

For more on our global LNG outlook, please see our Energy Observer, "Global Natural Gas and LNG Outlook: U.S. Exports Low Prices to the World" published in August 2017.